Thursday, May 13, 2010

Michael Lewis's "The Big Short"

This is a book about the guys who saw the housing bubble and went "short" on it, i.e. invested in the fact that those CDOs (those bundles of mortgages) would be worthless as more and more people stopped paying their mortgage and their houses were foreclosed. These guys who shorted won big time because the whole "market" in CDOs was built on Wall Street fraud, a trillion dollar fraud job. (And for which nobody has done a day in jail!)

The book is a fun read. Here's a bit about one guy who stopped being a resident neurologist and started his own investment company with $40,000 of his own money, $20,000 from his mother, and $10,000 from each of his brothers. After starting up and running for a few days he got a call from a big Wall Street investment firm. Here's how the meeting went:

He arrived at the big New York money management firm as formally attired as he had ever been in his entire life to find its partners in t-shirts and sweatpants. The exchange went something like this.

"We'd like to give you a million dollars."

"Excuse me?"

"We want to buy a quarter of your new hedge fund. For a million dollars."

"You do?"

"Yes. We're offering a million dollars."

"After tax!"

Now that is a wet dream for anybody that wants to start their own company. You are offered a million bucks and it is so surprising because you haven't pitched anything. You mumble a bit until they force you to take their million bucks! That's the story of Mike Barry who founded Scion Capital.

Here's a bit about Steve Eisman and his experience working on Wall Street:

The year was now 2002. There were no public subprime lending companies left in America. There was, however, an ancient consumer lending giant called Household Finance Corporation. Created in the 1870s, it had long been a leader in the field. Eisman understood the company well, he thought, until he realized that he didn't. In early 2002 he got his hands on Household's new sales document offering home equity loans. The company's CEO, Bill Aldinger, had grown Household even as his competitors went bankrupt. Americans, digesting the Internet bust, seemed in no position to take on new debts, and yet Household was making loans at a faster pace than ever. A big source of its growth had been the second mortgage. The document offered a fifteen-year, fixed-rate loan, but it was bizarrely disguised as a thirty-year loan. It took the stream of payments the homeowner would make to Household over fifteen years, spread it hypothetically over thirty years, and asked: If you were making the same dollar payments over thirty years that you are in fact making over fifteen, what would your "effective rate" of interst be? It was a weird, dishonest sales pitch. The borrower was told he had an "effective interest rate of 7 percent" when he was in fact paying something like 12.5 percent. "It was blatant fraud," said Eisman. "They were tricking their customers."

...Really, it was a federal issue. Household was peddling there deceptive mortgages all over the country. Yet the federal government failed to act. Instead, at the end of 2002, Household settled a class action suit out of court and agreed to pay a $484 million fine distributed to twelve states. The following year it sold itself, and its giant portfolio of subprime loans, for $15.5 billion to the British financial conglomerate the HSBC Group.

The book is full of tales to scare the bejeezus out of you. The US government lets criminals run lose bilking investors, running the economy into the ground, creating 10 million unemployed, and forcing the taxpayers to ante up trillions to save the economy. And nobody is put in jail for this!

The Gulf Oil Spill is small change compared to this, but everything I read says that the companies involved in that spill will dance away from punishment just like these fraudsters.

At worst, a few of the really big fish will be sent to "Club Fed" to practice their golf swing for a few years. Crime at this level is treated as a joke. You spend more time behind bars knocking off the corner store for $200 than if you cause a trillion dollar meltdown. There is no justice. The government is bought and paid for by the fraudsters in Wall Street and in the big corporations.